The three cascading constraints (3CC) view of globalisation made easy

The three cascading constraints (3CC) view of globalisation made easy

Globalisation is all the things that happen when goods, ideas, people and capital cross borders. Leaving aside capital (since it involves a very different set of issues), this suggests that globalisation has been constrained by the high cost of moving goods, ideas and people. This perspective is at the heart of the 3CC view of globalisation.

In the pre-globalised world, production and consumption were clustered in tight geographical areas since it was so difficult to move anything anywhere (see graphic 1).

Graphic 1

The planetary economy was very homogeneous economically; people were poor and societies were mostly agricultural since almost everyone made a living on the land. Trade happened but it was a rarity – something that could be enjoyed only by the rich and powerful.

As illustrated in the graphic 1, people were tied to the land and production was bundled with people (due to high trade costs), manufacturing was small-scale and widely dispersed. High communication costs mattered for a different reason.

Of course, there were exceptionally large cities that traded a lot, before the 19th centuries, but these were exceptional. For most people, consumption meant locally made food, clothing and shelter since it was too costly to get things made further away than walking distance.

Isolated innovation meant slow growth

Graphic 2

As people were tied to the land and production was bundled with people (due to high trade costs), manufacturing was small-scale and widely dispersed. This dispersion of production mattered since it deadened progress.

Innovations remained few and they spread only slowly, if at all, due to high communication costs, as illustrated in the graphic. The compass, for example, was invented in China and used for navigation from around the year 1000. It took more than two centuries for this knowledge to come to European navigators.

GDP per capita stagnated in most parts of the world

Without innovation, incomes stagnated and this was what happened during most of human history. If something came along that improved things, say the invention of steel, or new agricultural techniques, the result was more people, not higher income per person. The population expanded until the per-person productivity in agriculture was pushed back to a level that was not far from starvation.

This outcome can be seen in the graphic 3. For the 15 centuries after the year zero, there was almost no increase in income per person. The only exception was Western Europe and even there, growth was extremely slow. Average incomes rose by something like 10 percent points per century.

Graphic 3

In modern times, invention is the fuel that drives growth. New ideas, new products, and new ways of arranging work boost the production per worker directly. They also lift the reward to investing in new machines and new skills and so boost output indirectly as well. Investment in these forms of ‘capital’ (physical capital and human capital) are thus the consequence of innovation.

The high cost of moving ideas also hindered growth. When it was expensive and difficult to move goods, ideas and people, innovations were rare and spread slowly in the pre-globalised world. Indeed, communication was so difficult that important ideas could be, and were, forgotten. Knowledge rolled backwards in Europe during the centuries following the downfall of the Roman Empire in the 5th century. Much of the renaissance – French for rebirth – should more correctly be called ‘remembering’.

Lower trade costs allowed the unbundling of production and consumption: real globalisation begins

The cost of moving goods over great distances fell radically in the 19th century due to revolutionary advances in transportation technology and the relative peace that came with Pax Britannica. This made it economical for people to buy goods made far away, as the graphic suggests.
Once this separation of production and consumption (see the graphic 4) was practicable, the big international price differences made long distance trade profitable. The booming trade and resulting competition guided nations to focus on their most competitive sectors while importing the products they were less good at making.

Graphic 4

As markets expanded globally, production clustered locally

Sales soared as trade costs fell and this favoured industrial-scale manufacturing. Since it was still expensive to communicate over distances, firms clustered complex industrial processes into factories and industrial districts. Consumption and production were no longer grouped within walking distance, but production became even more concentrated spatially as cottage industry turned into modern industry, as the graphic 5 illustrates.

Graphic 5

In other words, the fact that trade costs fell but communication costs fell by much less induced industry to cluster locally even as it dispersed internationally. This micro-clustering of production had an historic impact on the world’s economic geography.

Industrial clustering boosted innovation in today’s rich nations

The crowding together of large-scale manufacturing ignited a ‘bonfire’ of cumulative innovation and modern economic growth, as the graphic suggests. Manufacturing in today’s rich countries boosted exports which furthered the clustering of manufacturing which in turn heightened industrial competencies. The higher competency, in turn, raised the comparative advantage of today’s rich nations in producing industrial goods and this led to more exporting.

Graphic 6

As trade costs continued to fall, this cumulative process – which operated throughout the 19th and 20th centuries – resulted in most manufacturing taking place in today’s rich nations. The G7 industrialised while China and India-Pakistan deindustrialised.

Graphic 7

The high cost of moving ideas meant that the fruits of these new ideas stayed local, i.e. in today’s rich nations. Incomes and wages rose in industrialising nations but much less elsewhere in the world.
In this way, the easy movement of goods combined with the difficult movement of ideas led to a very lopsided accumulation of know-how in the advanced nations. The result was the Great Divergence of incomes and wages between today’s rich nations and today’s developing nations. As the chart shows, the G7’s share of world income soared while that of China and India plummeted (see graphic 8) from 1820 to about 1990.

Graphic 8

The ICT revolution triggers the 2nd unbundling

Revolutionary advances in communication technology radically lowered the cost of moving ideas internationally. This made it possible to coordinate different stages of manufacturing at great distance. Given the big wage differences between the G7 and developing nations, many industrial firms in today’s rich nations – especially in the US, Germany and Japan – found it profitable to offshore some stages of production to low-wage nations as illustrated in the graphic 9.

Graphic 9

Putting it differently, the ICT Revolution relaxed the constraint that had forced the micro-clustering into factories and industrial districts. Once it became thinkable to separate various stages of production, firms moved some stages of production to nearby developing nations in order to lower costs.

Global Value Chains open a conduit for flows of knowledge to developing nations

Offshoring production was made possible by lower communication costs. The offshoring, however, didn’t end the need to coordinate – it internationalised it. To this end, the offshoring firms sent their knowledge along with the jobs. After all, they had to make sure that the unbundled stages operated in harmony with the whole. This meant that low-wage labour was working with advanced technology, as the graphic 10 suggests with the light bulbs crossing international frontiers instead of staying within national boundaries.

Graphic 10

The new, ICT-enabled combination of high-tech and low wages has transfigured the world of manufacturing across the planet. This change, in turn, is an important reason for the sudden and massive shift in manufacturing from G7 nations to a handful of nearby developing nations – especially China, as the graphic 11 shows.

Graphic 11

Knowhow moves across national borders within GVC boundaries

From 1990, the ICT Revolution relaxed the communication constraint and G7 factories unbundled across North-South borders. This changed technology boundaries; technology became less defined by national borders and more by the contours of international production networks.

The flows of goods, know-how, investment, training, ideas, and people that used to flow only inside G7 factories is now part of international commerce. This started to rebalance the massive knowledge imbalance that arose during the Great Divergence – at least for the developing nations involved in GVCs, as the graphic 12 shows.